Hillary Clinton HFT tax proposal - reaction from ParFX

First Published 9th October 2015

This week, US Democratic Presidential candidate Hillary Clinton proposed an idea of taxing high frequency transactions with excessive order cancellations that are deemed to enable abusive trading or could threaten to destabilise financial markets. In response, Dan Marcus, CEO of ParFX, the trading platform launched by 14 global banks specifically to combat disruptive trading behaviour, outlines his view on how regulatory authorities can tackle this issue.

Dan Marcus, ParFX

I think what Hillary Clinton is proposing is not necessarily new
- a tax on financial transactions has been floated in Europe -
but would be clearly welcomed by those who see the machines as a
bad influence in financial markets.

HFT clearly still has a reputation problem, but at the same time
it's important to note that high-frequency trading is not bad in
itself, and it is unfair to paint all those who practice it with
the same 'dark arts' brush. It is a logical and natural evolution
of electronic trading which brings many benefits.

However, there are some real concerns relating to disruptive
trading behaviour and these are justified and worthy of
discussion. In the pursuit of speed, disruptive trading behaviour
and an arms race for the fastest market data and technology has
created inefficiencies that damaged the wider trading
environment.

But how should the market and regulators react? Rather than an
ineffective and expensive cure in the form of legislation or
taxation on trades, which will take years to implement and almost
certainly result in regulatory arbitrage, a proactive
preventative solution is required.

In the same way bad drivers caught speeding are held responsible
for their actions, as opposed to blame apportioned to the cars
they drive, the focus needs to be on eradicating disruptive
trading behaviour and the intent behind it.

The central issue is around the behaviour and conduct of
individuals engaging in such practices, and the trading venues
encouraging or facilitating this type of behaviour. Ultimately,
this is what needs to change.

In partnership with 14 global banks, who expressed a strong
desire to address these issues, ParFX has introduced a multitude
of features that removes the emphasis on speed as a factor of
success. This included the introduction of a meaningful
randomised pause of 10-30 milliseconds on the platform.

Essentially, what this does is deliberately slow down and
randomise trading instructions so the fastest, latency-dependent
traders have no guarantee of being the fastest. This means the
platform does not suit extreme low-latency disruptive strategies
as they simply will not work in the trading ecology we have
created.

However, the pause is meaningless to those that come with a
genuine trading need, who seek firm, executable liquidity and
compete on strategy. We are finding that the firms we speak to
are motivated by competing on intelligence rather than speed, and
we have yet to meet anyone who disagrees with our philosophy.